National Security Adviser Sullivan Proposes New International Economic Strategy, With Key Role for North American Supply Chains
In an important speech at the Brookings Institution on April 27, the U.S. National Security Adviser, Jake Sullivan, laid out a comprehensive international economic strategy in the face of new “geopolitical realities.” A key element of the strategy is strengthening North American supply chains, especially as they address the threat of climate change. “We are leveraging the Inflation Reduction Act to build a clean-energy manufacturing ecosystem rooted in supply chains here in North America, and extending to Europe, Japan, and elsewhere,” he said. But, he added, “our cooperation with partners is not limited to clean energy.” He cited semiconductors, a sector where, with Commerce Secretary Gina Raimondo heavily involved, the U.S., Mexico and Canada are working together “to adapt government policies and increase investment in semiconductor supply chains across North America. “ More broadly, a survey earlier this year by the firm Capterra found that 88% of U.S.-based small and medium-sized businesses will “reshuffle their supply chains to utilize suppliers in the U.S. or Mexico in 2023,” according to an article in Freightwaves. “The switch to nearshoring is happening faster than was predicted in 2021,” the survey said. “Most industry professionals predicted this change would happen very slowly over five or more years. But even the 2022 numbers we see in the data are stronger than those predictions, and 2023 will continue to see a rapid shift to nearby suppliers.” The effort to expand North American supply chains is part of what Sullivan called “a modern industrial and innovation strategy.” He called this strategy “a new Washington consensus,” a reference to a term coined in 1989 that emphasized reducing trade restrictions, reforming politically oriented taxes, eliminating nationalized industries, and, in general, having free-market policies dominate. What Sullivan described was closer to what is called “industrial policy,” where the government takes a larger role in shaping the economy. Mexico and U.S. may, in fact, be moving toward a shared industrial policy. Last fall, Mexico’s Economia, its economics ministry, presented, “Towards an Industrial Policy,” which seeks to align the efforts of public and private actors across “four cross-cutting axes:…innovation and technological-scientific trends; training of human capital for new trends; promotion of regional content; and sustainable industries.” The new Washington consensus, as described by Sullivan, addresses four major challenges: 1) the hollowing out of America’s industrial base as the nation outsourced production to other countries, especially China; 2) the failed assumption that economic integration would make China and Russia more responsible and the subsequent threats to national security that these two nations are now posing; 3) the climate crisis and the need for an energy transition; and 4) inequality at home and what Sullivan calls “its damage to democracy.” On the last point, Sullivan said that the “China shock…hit pockets of our domestic manufacturing industry especially hard…[and] frayed the socioeconomic foundations on which any strong and resilient democracy rests.” Worries That the U.S. Will Try to Go It Alone Sullivan was at pains not to give the impression that the U.S. believes that nearshoring, rather than onshoring (making everything possible in the U.S.) is the answer to current challenges, but observers still got the impression that the U.S. wants to try to go it alone if it can. In his response to the speech, Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics welcomed Sullivan’s vision for a “strong, resilient, and leading-edge techno-industrial base” shared between the U.S. and partners. That vision “is much more realistic than making everything at home, but the speech will not change widespread perception that bringing as much activity as possible to the United States—often to the consternation of U.S. allies, as with the Inflation Reduction Act—is the primary goal.” Similarly, David Dollar, a senior fellow in economics at Brookings, said in reaction to the speech, “What worries me is the heavy focus on industrial policy measures that involve both subsidies and protection of the domestic market through ‘Buy American’ provisions…. In my opinion the protectionism will prove to be a mistake.” Fareed Zakaria of CNN also said that parts of the new “Biden Doctrine” made him nervous. “Sullivan insisted that these polices were not designed to be ‘America First’ or ‘America Alone,’” wrote Zakaria in his Washington Post column. “But the facts are clear. Almost every element of Biden’s economic policy has a ‘Buy America’ component to it.” Oren Cass, the influential executive director of American Compass, a right-of-center think tank, praised Sullivan for his “sophisticated critique of ‘oversimplified market efficiency.’” But Cass warned that, contrary to Sullivan’s approach, a “de-coupling” from China and not merely a “de-risking” is essential. Cass wrote, “We only countenanced a coupling with China because we assumed wrongly that it would lead to economic and political liberalization.” That liberalization didn’t happen. As Sullivan said, “Economic integration didn’t stop China from expanding its military ambitions in the region, or stop Russia from invading its democratic neighbors. Neither country has become more responsible or cooperative.” In his speech, Sullivan noted that “the main international project of the 1990s was reducing tariffs.” But tariffs aren’t everything. They certainly aren’t a strategy. “Asking what our trade policy is now – narrowly framed as plans to reduce tariffs further – is simply the wrong question,” he said. “The right question is: how does trade fit into our international economy policy, and what problems is it seeking to solve?” Number-one on Sullivan’s list of problems is “creating diversified and resilient supply chains.” And it’s clear that Mexico plays a critical role in that diversification and resilience. New Investment in Mexico Bolsters North American Near-Shoring A month before the Sullivan speech, David Gantz, who is the Will Clayton Fellow in Trade and Economics at the Baker Institute in Houston, released a paper on the favorable consequences of foreign investment in Mexico. Since October 2021, Gantz writes, “an estimated $7 billion in new foreign investment has entered the state of Nuevo Leon, currently one of the Mexican states most popular for foreign investment. About half of this investment has come from the United States. Why is foreign investment pouring into Mexico in what Samuel Garcia, the new governor of Nuevo Leon, called “a geopolitical planetary alignment”? Gantz lists:
Gantz points out that U.S. policy makers often lean toward onshoring or “Buy American” approach. “Realistically, however, for some products labor costs and other factors make elimination of imports impractical — including most footwear, clothing, consumer electronics, and items like furniture and computers that are made in Mexico.” Nearshoring is a win-win-win proposition. Gaining are Mexico, the U.S., and American consumers. A 24-Year-Old Entrepreneur: The Re-Orienting of Supply Chains to Mexico Is ‘Unstoppable’ In a fascinating Forbes interview, Gary Drenik, CEO of Prosper Business Development, a consulting firm, interviewed Alfonso De los Rios, the 24-year-old founder of Nowports, the largest 100% digital freight forwarder in Latin America. De los Ríos, from Monterrey, “started programming at a very young age after growing up in a home where there was no shortage of economic hardship.” Here's an excerpt from the interview: Drenik: What else does Mexico need to become the iconic nearshoring market? Alfonso De los Ríos: With nearshoring nipping at the heels of the Mexican economy, industrial developers increased the speed of building new projects during 2022 (70% more than in 2021). However, more than twice as much space would still be needed to be built in 2022. Mexico is becoming the hottest market in the region, in terms of production, skilled professionals, and advanced facilities. This is going to renew the private sector in the country with long-lasting positive consequences. Drenik: Why is the “nearshoring effect” massively attracting international companies to Mexico? De los Rios: Tesla is the latest in a long stream of companies to announce big plans of building factories in Mexico, following other big names, while warehouses are becoming shiny gems for multinational companies in different Mexican cities. It’s clear that the re-orientation of global supply chains is unstoppable. That is why we have recently expanded to the U.S. to bridge the gap between the two regions and believe that Mexico is becoming increasingly attractive for big companies looking to increase their manufacturing standards and delivery times. Drenik: What is the big nearshoring picture ahead? De los Rios: Companies that set a foot in Mexico will have greater visibility, shorter delivery times, and influence the quality of their products. It’s also important that the shipping industry can keep up with these transformations. In that sense, it needs to become paperless and data-driven.
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